PBT - Texas Pacific Land: Sneaking Back Into The Bargain Bin

2023-07-03 03:19:43 ET

Summary

• Texas Pacific Land represents an interesting buy opportunity, based on the significant -50% price drop since its 2022 peak vs. only a slight decline in operating results.
• The stock's valuation is back near the lower end of its historical range, with underlying growth in the business likely over time.
• Similar to the recession selloffs in early 2020 and 2008-09, the latest technical picture is ripe for a reversal in the coming months.

Texas Pacific Land Corp . ( TPL ) is a stock I last mentioned in a bullish note during December 2020 here , when the share price was under $700. After that article, the quote shot up to $1600 in April 2021, reaching a peak of $2700 in November 2022. (Note: all prices and charts are dividend adjusted in this article.)

However, since that point, price has cratered by greater than -50% to just above $1300 now. Definitely, if you purchased near the top 6-8 months ago, you are not happy with TPL for investment returns of late.

My current view is $1300 per share represents a reasonable value to purchase a fraction of nearly 1 million acres owned/managed in western Texas (mostly Permian Basin) with limited debts and liabilities vs. cash on hand. Ever rising royalty streams from oil/gas development on many of the acres is the main business model.

Statistically speaking, the wicked and sustained price decline of better than -40% over a rolling 6-month span, with a concurrent a drop well underneath its 2-year moving average, has only been surpassed in a bearish way one time since the mid-1970s: during the tail end of the Great Recession in 2008-09.

To me, the overall buy argument now is perhaps the strongest since early 2021. Historically, the size of the price decline since late 2022 should be reviewed under a contrarian light, assuming the underlying long-term value of the land continues to increase at past rates with inflation and rising energy demand globally. Therefore, I am reissuing a Buy rating at prices under $1400 for the rest of 2023.

Valuation Makes Sense to Own

The basic worth of the company has not declined by -50% over the last eight months. Sure, crude oil and natural gas prices have come down materially from last spring’s fossil fuel energy price spike, during the Russian invasion of Ukraine. But, TPL owns decades of future royalty payments coming to shareholders as Texas energy resources are drilled and pumped out of the ground.

The bullish proposition is an opposite swing in investor sentiment from bearish to bullish could be approaching on rising crude oil and natural gas prices, either from FED easing during a recession later in 2023, a new economic upturn in 2024, and/or any jump in quotes caused by future “black swan” shortage-induced problems in the Middle East (which tend to occur without much warning on a fairly regular basis since the 1970s).

Below is a 10-year graph of basic fundamental ratio analysis looking at price to trailing earnings, sales, cash flow, and book value. In terms of operating results on your invested capital at $1300 per share today, I can argue Texas Pacific Land is just as cheap now as late 2020 or late 2015.

When we include changing cash and debt levels over the years, the enterprise valuation on EBITDA and sales is also trading at a discount to long-term averages. If you are worried about paying too much for a volatile oil & gas business, TPL may more aptly represent a buy idea closer to a commodity-cycle low than a peak.

Total Return Performance

Texas Pacific Land has been one of the top performers in the U.S. oil/gas industry for investors over the last decade. The stock price gain, plus dividends received, has run circles around the traditional oil giants you read about in the newspapers or pushed by mainstream financial websites. Below I have charted various time frames to review performance for long-term investors.

I am also drawing the closest Texas peer involved in royalty payments on land holdings, Permian Basin Royalty Trust ( PBT ). I wrote about the upside potential of this investment back in October 2019 here . PBT as a simple trust investment has not disappointed, with a total return of +660% vs. an S&P 500 equivalent gain of +47% over the last 44 months.

A final comparison idea is to list returns from two industry-peer categories, the Energy Select Sector SPDR ETF ( XLE ) and SPDR S&P Oil & Gas Exploration & Production ETF ( XOP ). To get a feel for the overall swings in alternative petroleum-focused investment gains/losses for shareholders, we can determine whether TPL is outlining better or worse performance than others.

One conclusion from our performance charts is TPL has been a runaway winner for those buying and holding over the last decade. Another is the price drop since November has really shaken the tree, if chasing returns and buying after a multi-year rise has been your strategy.

Exaggerated Selloff Creates Opportunity?

The good news is the monster price drop over the last eight months may have opened a terrific opportunity to buy shares again. Why? Not only are valuation stats zigzagging back toward the low end of its historical range, but the price drop in and of itself is quite rare for TPL. The stock has often sold off by -20% or -30% over spans of less than six months, but such declines have been synonymous with “retracements” after major price increases. Since 1983, a sustained price tank of -40% or greater over a 6-month period, to a level well below its 2-year moving average has really only happened three other times. That’s right. Over four decades, June’s technical price change setup is incredibly rare. Similar circumstances have only played out during the 2020 pandemic panic and crude oil implosion, 2015’s oil shakeout, and the Great Recession of 2008-09.

I have drawn these technical readouts below. A rolling 6-month price change back to 1983 is presented first. Then, weekly price & volume charts running 10 years each, with the 2-year moving average, are next (2003-2023).

Further, focusing on the daily charts for 2020, 2015, and 2008-09, we can see bottom fishing in the stock when price is considerably underneath both the 50-day and 200-day moving averages has been rewarded a year or two later.

2020

The oil bust of early 2020 was perhaps the sharpest industry drawdown I have witnessed firsthand since I started trading in 1986. Texas Pacific Land dropped from $780 to under $290 over less than three months for a staggering -63% loss. Yet, had you purchased shares in March under $500 per share, a year later price approached $1700, good for a +240% jump in value (or even better if buying under $400 or $300 for those lucky enough).

2015

The next example of a -40% drop over a 6-month span officially occurred in January-February 2015. But you could have purchased TPL shares cheaply in August of that year and again in January 2016, around the same $100 to $110 area. From these three buy points, gains of better than +150% were achieved after waiting 1-2 years.

2008-09

My last example of why to consider buying TPL after a massive -40% or greater price dump comes from the Great Recession experience. Between October 2008 and March 2009, smart investors could have scooped up a long-term bargain. Using the same criteria of a -40% sustained decline, with price well under the existing 2-year moving average, including a daily chart setup far beneath the 50-day and 200-day moving averages, purchases under $30 to as low as $15 a share (dividend adjusted after 15 years of payouts) were possible after October. While an immediate bounce back above $30 took place in the summer of 2009 creating minor gains right away, it would take a few more years to reach significant gains. Yet, those holding shares into the meat of the fracking boom would be richly rewarded for socking the stock away over the next decade, as $800 (dividend adjusted) was reached by 2018 for an eye-popping +2500% total return advance.

Final Thoughts

The hydraulic fracturing method (fracking revolution) in America for extracting oil/gas has allowed for stronger production recoveries and new economic resource finds across Texas. Honestly, TPL has turned into one of the biggest beneficiaries of this technology invention for retail investors over the last 20 years, with its massive land holdings and royalty business. Water support services for drilling and fracking have also become an important source of revenue.

In addition, the green-energy revolution is not passing by Texas Pacific Land. The company has made selling surface rights for solar and wind farm projects a priority over the last five years. So, in some instances the company is benefiting from a royalty stream for surface clean-energy production, while taking a cut from the same acreage for oil/gas production deep under the surface.

In the end, the direction of oil/gas prices will be a critical driver of the stock quote as royalties will follow suit. Of course, new exploration and drilling activity will also depend on fossil fuels rising faster in price than the cost of production. As a TPL owner, you will be rooting for (and hedging your whole portfolio against) higher crude oil and natural gas prices.

With limited use of leverage and few capital expenditures necessary to grow the business, the main and really only risk at this stage of the company’s and U.S. economy’s life cycle is oil/gas prices do not recover to 2022 levels anytime soon. Assuming static petroleum quotes, Wall Street analyst consensus is projecting a decline in revenues of -12% ($587 million) and EPS of -19% ($46.83) for 2023, all a byproduct of lower energy prices vs. a year ago. Then, a resumption of steady growth in the 15% to 20% annualized range is forecast by Wall Street to reassert itself starting in 2024.

I rate shares a Buy and am looking to enter a position in coming weeks. Any price move lower on recession’s appearance into the autumn months may likely bring an even better compounding opportunity long term, much like the excessive recession selloffs of 2020 and 2008-09.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

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